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EX-32.2 - EX-32.2 - GRIFFIN INDUSTRIAL REALTY, INC.grif-20170531ex3229d9974.htm
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EX-31.2 - EX-31.2 - GRIFFIN INDUSTRIAL REALTY, INC.grif-20170531ex31276d378.htm
EX-31.1 - EX-31.1 - GRIFFIN INDUSTRIAL REALTY, INC.grif-20170531ex3112e056a.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED May 31, 2017

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM              TO             

 

Commission File No. 1-12879

 

GRIFFIN INDUSTRIAL REALTY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

06-0868496

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification Number)

 

 

 

641 Lexington Avenue, New York, New York

 

10022

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s Telephone Number including Area Code  (212) 218-7910

______________________________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

Emerging growth company ☐

 

If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

Number of shares of Common Stock outstanding at June 30, 2017:  5,000,535

 

 

 

 


 

GRIFFIN INDUSTRIAL REALTY, INC.

 

FORM 10-Q

 

Index

 

 

 

 

 

PART I  -

 

FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets (unaudited) as of May 31, 2017 and November 30, 2016

3

 

 

 

 

 

 

Consolidated Statements of Operations (unaudited) for the Three Months and Six Months Ended May 31, 2017 and  2016

4

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Months and Six Months Ended May 31, 2017 and 2016

5

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Six Months Ended May 31, 2017 and 2016

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended May 31,  2017 and 2016

7

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

8-22

 

 

 

 

 

ITEM 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23-32

 

 

 

 

 

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

 

 

 

ITEM 4

Controls and Procedures

32-33

 

 

 

 

PART II - 

 

OTHER INFORMATION

 

 

 

 

 

 

ITEM 1

Not Applicable

 

 

 

 

 

 

ITEM 1A

Risk Factors

33

 

 

 

 

 

ITEMS 2-5

Not Applicable

 

 

 

 

 

 

ITEM 6

Exhibits

33-37

 

 

 

 

 

 

SIGNATURES

38

 

 

 

 


 

PART I  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Balance Sheets

(dollars in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

May 31, 2017

 

Nov. 30, 2016

 

ASSETS

 

 

 

 

 

 

 

Real estate assets at cost, net

 

$

171,219

 

$

172,260

 

Real estate held for sale

 

 

2,711

 

 

2,992

 

Cash and cash equivalents

 

 

32,144

 

 

24,689

 

Deferred income taxes

 

 

2,865

 

 

4,984

 

Proceeds held in escrow

 

 

9,710

 

 

3,535

 

Other assets

 

 

16,362

 

 

15,163

 

Total assets

 

$

235,011

 

$

223,623

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Mortgage loans, net of debt issuance costs

 

$

119,970

 

$

109,697

 

Deferred revenue

 

 

10,142

 

 

9,526

 

Accounts payable and accrued liabilities

 

 

2,556

 

 

4,140

 

Dividend payable

 

 

 —

 

 

1,514

 

Other liabilities

 

 

9,062

 

 

7,943

 

Total liabilities

 

 

141,730

 

 

132,820

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

Common stock, par value $0.01 per share, 10,000,000 shares authorized, 5,541,029 shares issued and 5,000,535 and 5,047,708 shares outstanding, respectively

 

 

55

 

 

55

 

Additional paid-in capital

 

 

108,608

 

 

108,438

 

Retained earnings

 

 

3,967

 

 

179

 

Accumulated other comprehensive loss, net of tax

 

 

(1,055)

 

 

(1,049)

 

Treasury stock, at cost, 540,494 and 493,321 shares, respectively

 

 

(18,294)

 

 

(16,820)

 

Total stockholders' equity

 

 

93,281

 

 

90,803

 

Total liabilities and stockholders' equity

 

$

235,011

 

$

223,623

 

 

See Notes to Consolidated Financial Statements.

 

3


 

GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Statements of Operations

(dollars in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

    

May 31, 2017

    

May 31, 2016

    

May 31, 2017

    

May 31, 2016

 

Rental revenue

 

$

7,332

 

$

6,802

 

$

14,311

 

$

13,484

 

Revenue from property sales

 

 

10,755

 

 

(278)

 

 

10,755

 

 

(278)

 

Total revenue

 

 

18,087

 

 

6,524

 

 

25,066

 

 

13,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses of rental properties

 

 

2,204

 

 

1,992

 

 

4,689

 

 

4,158

 

Depreciation and amortization expense

 

 

2,386

 

 

2,169

 

 

4,736

 

 

4,314

 

Costs related to property sales

 

 

2,660

 

 

 —

 

 

2,660

 

 

 —

 

General and administrative expenses

 

 

2,166

 

 

2,093

 

 

4,396

 

 

3,660

 

Total expenses

 

 

9,416

 

 

6,254

 

 

16,481

 

 

12,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

8,671

 

 

270

 

 

8,585

 

 

1,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,444)

 

 

(1,062)

 

 

(2,757)

 

 

(2,153)

 

Gain on sale of assets

 

 

 —

 

 

122

 

 

 —

 

 

122

 

Investment income

 

 

53

 

 

55

 

 

62

 

 

62

 

Income (loss) before income tax (provision) benefit

 

 

7,280

 

 

(615)

 

 

5,890

 

 

(895)

 

Income tax (provision) benefit

 

 

(2,553)

 

 

236

 

 

(2,102)

 

 

181

 

Net income (loss)

 

$

4,727

 

$

(379)

 

$

3,788

 

$

(714)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

$

0.95

 

$

(0.07)

 

$

0.75

 

$

(0.14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share

 

$

0.94

 

$

(0.07)

 

$

0.75

 

$

(0.14)

 

 

See Notes to Consolidated Financial Statements.

4


 

GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

    

May 31, 2017

    

May 31, 2016

    

May 31, 2017

    

May 31, 2016

 

Net income (loss)

 

$

4,727

 

$

(379)

 

$

3,788

 

$

(714)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassifications included in net income (loss)

 

 

218

 

 

214

 

 

427

 

 

427

 

Increase (decrease) in fair value of Centaur Media plc

 

 

65

 

 

(83)

 

 

192

 

 

(339)

 

Unrealized (loss) gain on cash flow hedges

 

 

(829)

 

 

26

 

 

(625)

 

 

(1,115)

 

Total other comprehensive (loss) income, net of tax

 

 

(546)

 

 

157

 

 

(6)

 

 

(1,027)

 

Total comprehensive income (loss)

 

$

4,181

 

$

(222)

 

$

3,782

 

$

(1,741)

 

 

See Notes to Consolidated Financial Statements.

5


 

GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended May 31, 2017 and May 31, 2016

(dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares of

 

 

 

 

Additional

 

 

 

Accumulated Other

 

 

 

 

 

 

 

 

Common Stock

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury

 

 

 

 

    

Issued

    

Stock

    

Capital

    

Earnings

    

Loss

    

Stock

    

Total

Balance at November 30, 2015

 

5,541,029

 

$

55

 

$

108,188

 

$

1,117

 

$

(1,085)

 

$

(13,466)

 

$

94,809

Stock-based compensation

 

 —

 

 

 —

 

 

114

 

 

 —

 

 

 —

 

 

 —

 

 

114

Repurchase of common stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,951)

 

 

(1,951)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(714)

 

 

 —

 

 

 —

 

 

(714)

Total other comprehensive loss, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,027)

 

 

 —

 

 

(1,027)

Balance at May 31, 2016

 

5,541,029

 

$

55

 

$

108,302

 

$

403

 

$

(2,112)

 

$

(15,417)

 

$

91,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at November 30, 2016

 

5,541,029

 

$

55

 

$

108,438

 

$

179

 

$

(1,049)

 

$

(16,820)

 

$

90,803

Stock-based compensation

 

 —

 

 

 —

 

 

170

 

 

 —

 

 

 —

 

 

 —

 

 

170

Repurchase of common stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,474)

 

 

(1,474)

Net income

 

 —

 

 

 —

 

 

 —

 

 

3,788

 

 

 —

 

 

 —

 

 

3,788

Total other comprehensive loss, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6)

 

 

 —

 

 

(6)

Balance at May 31, 2017

 

5,541,029

 

$

55

 

$

108,608

 

$

3,967

 

$

(1,055)

 

$

(18,294)

 

$

93,281

 

 

See Notes to Consolidated Financial Statements.

6


 

GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

    

May 31, 2017

    

May 31, 2016

 

Operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

3,788

 

$

(714)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

(Gain) loss on sales of properties

 

 

(8,095)

 

 

278

 

Depreciation and amortization

 

 

4,736

 

 

4,314

 

Deferred income taxes

 

 

2,102

 

 

(181)

 

Stock-based compensation expense

 

 

170

 

 

114

 

Amortization of debt issuance costs

 

 

134

 

 

102

 

Gain on sale of assets

 

 

 —

 

 

(122)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Other assets

 

 

(991)

 

 

348

 

Accounts payable and accrued liabilities

 

 

(923)

 

 

(116)

 

Deferred revenue

 

 

720

 

 

(1,233)

 

Other liabilities

 

 

913

 

 

73

 

Net cash provided by operating activities

 

 

2,554

 

 

2,863

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Proceeds from sales of properties, net of expenses

 

 

10,086

 

 

 —

 

Proceeds from property sales deposited in escrow, net

 

 

(6,175)

 

 

 —

 

Additions to real estate assets

 

 

(5,322)

 

 

(8,393)

 

Deferred leasing costs and other

 

 

(874)

 

 

(550)

 

Net cash used in investing activities

 

 

(2,285)

 

 

(8,943)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Proceeds from mortgage loans

 

 

12,000

 

 

18,800

 

Payments on mortgage loans

 

 

(1,604)

 

 

(8,699)

 

Dividends paid to stockholders

 

 

(1,514)

 

 

(1,546)

 

Repurchase of common stock

 

 

(1,474)

 

 

 —

 

Payment of debt issuance costs

 

 

(222)

 

 

(225)

 

Mortgage proceeds returned from escrow

 

 

 —

 

 

600

 

Net cash provided by financing activities

 

 

7,186

 

 

8,930

 

Net increase in cash and cash equivalents

 

 

7,455

 

 

2,850

 

Cash and cash equivalents at beginning of period

 

 

24,689

 

 

18,271

 

Cash and cash equivalents at end of period

 

$

32,144

 

$

21,121

 

 

See Notes to Consolidated Financial Statements.

7


 

GRIFFIN INDUSTRIAL REALTY, INC.

Notes to Consolidated Financial Statements

(dollars in thousands unless otherwise noted, except per share data)

(unaudited)

 

1.    Summary of Significant Accounting Policies

 

Basis of Presentation

 

Griffin Industrial Realty, Inc. ("Griffin") is a real estate business principally engaged in developing, managing and leasing industrial/warehouse properties and, to a lesser extent, office/flex properties. Griffin also seeks to add to its property portfolio through the acquisition and development of land or purchase of buildings. Periodically, Griffin may sell certain portions of its undeveloped land that it has owned for an extended time period and the use of which is not consistent with Griffin's core development and leasing strategy. These financial statements have been prepared in conformity with the standards of accounting measurement set forth by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 270, “Interim Reporting” and in accordance with the accounting policies stated in Griffin’s audited consolidated financial statements for the fiscal year ended November 30, 2016 (“fiscal 2016”) included in Griffin’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on February 10, 2017. These financial statements should be read in conjunction with the Notes to Consolidated Financial Statements appearing in that report. All adjustments, comprising only normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of results for the interim periods, have been reflected and all intercompany transactions have been eliminated. The consolidated balance sheet data as of November 30, 2016 was derived from Griffin’s audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. Griffin regularly evaluates estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation expense, deferred income tax asset valuations, valuation of derivative instruments and the estimated costs to complete required offsite improvements related to land sold. Griffin bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by Griffin may differ materially and adversely from Griffin’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

As of May 31, 2017, Griffin was a party to several interest rate swap agreements to hedge its interest rate exposure. Griffin does not use derivatives for speculative purposes. Griffin applies FASB ASC 815-10, “Derivatives and Hedging,” (“ASC 815-10”) as amended, which establishes accounting and reporting standards for derivative instruments and hedging activities. ASC 815-10 requires Griffin to recognize all derivatives as either assets or liabilities on its consolidated balance sheet and measure those instruments at fair value. The changes in the fair values of the interest rate swap agreements are measured in accordance with ASC 815-10 and reflected in the carrying values of the interest rate swap agreements on Griffin’s consolidated balance sheet. The estimated fair values are based primarily on projected future swap rates.

 

Griffin applies cash flow hedge accounting to its interest rate swap agreements that are designated as hedges of the variability of future cash flows from floating rate liabilities based on the benchmark interest rates. Changes in the fair values of Griffin’s interest rate swap agreements are recorded as components of accumulated other comprehensive income (loss) in stockholders’ equity to the extent they are effective. Any ineffective portions of the changes in fair values of these instruments would be recorded as interest expense or interest income.

 

The results of operations for the three months ended May 31, 2017 (the “2017 second quarter”) and the six months ended May 31, 2017 (the “2017 six month period”) are not necessarily indicative of the results to be expected for the full year. The three months and six months ended May 31, 2016 are referred to herein as the “2016 second quarter” and “2016 six month period,” respectively. Certain amounts from the 2016 second quarter and 2016 six month period have been reclassified to conform to the current presentation.  

8


 

 

Recent Accounting Pronouncements

 

In May 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-09, “Compensation – Stock Compensation:  Scope of Modification Accounting,” which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. This update requires modification only if the fair value, vesting conditions or the classification of the award changes as a result of the change in terms or conditions. This Update will become effective for Griffin in fiscal 2018. Early adoption is allowed and the Update will be applied on a prospective basis. The adoption of ASU No. 2017-09 is not expected to have a material impact on Griffin’s consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation:  Improvements to Employee Share-Based Payment Accounting,” which relates to the accounting for employee share-based payments. This Update addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This Update will become effective for Griffin in fiscal 2018. Early adoption is allowed, but all of the guidance must be adopted in the same period. Griffin is evaluating the impact that the application of this Update will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. The accounting applied by lessors under this Update is largely unchanged from that applied under current U.S. GAAP. Leases will be either classified as finance or operating, with classification affecting the pattern of expense recognition in the income statement. This Update also requires significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. This Update will become effective for Griffin in fiscal 2020 using a modified restatement approach for leases in effect as of and after the date of adoption. Early adoption and practical expedients to measure the effect of adoption will also be allowed. Griffin is evaluating the impact that the application of this Update will have on its consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall,” which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). This Update also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This Update eliminates the requirement for an entity to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. In addition, entities must assess the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. This Update will be effective for Griffin in fiscal 2019. Early adoption is permitted for certain provisions. Upon adoption, changes in the fair value of Griffin's available-for-sale securities will be recognized through net income.

 

In April 2015, the FASB issued ASU No. 2015-03, “Interest-Imputation of Interest,” (“ASU 2015-03”) which requires that debt issuance costs related to a recognized liability be presented on the balance sheet as a direct reduction from the carrying amount of the associated debt liability, consistent with debt discounts. This Update must be applied on a retrospective basis and was adopted by Griffin in the fiscal 2016 fourth quarter. The adoption of this guidance required Griffin to reclassify its debt issuance costs on nonrecourse mortgage loans from other assets to mortgage debt on its statement of financial position but did not have an impact on Griffin’s results of operations. The effect of the reclassification on Griffin’s statement of financial position is quantified in Note 4.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This Update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance, and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Additionally, the Update requires improved disclosures to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. The Update permits the use of either the retrospective or cumulative effect transition method. This Update will be effective for Griffin in fiscal 2019

9


 

and early adoption is not permitted. Certain aspects of this new standard may affect revenue recognition of Griffin. Griffin is evaluating the impact that the application of this Update will have on its consolidated financial statements.

 

 

 

 

2.    Fair Value

 

Griffin applies the provisions of FASB ASC 820, “Fair Value Measurement” (“ASC 820”), which establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Categorization of an asset or a liability within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value, as follows:

 

Level 1 applies to assets or liabilities for which there are quoted market prices in active markets for identical assets or liabilities. Griffin’s available-for-sale securities are considered Level 1 within the fair value hierarchy.

 

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, such as quoted prices for similar assets or liabilities in active markets; quoted prices for assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.  Level 2 assets and liabilities include Griffin’s interest rate swap agreements (see Note 4). These inputs are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, Griffin has categorized these derivative instruments as Level 2 within the fair value hierarchy.

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

During the 2017 six month period, Griffin did not transfer any assets or liabilities into or out of Levels 1 or 2. The following are Griffin’s financial assets and liabilities carried at fair value and measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 31, 2017

 

 

    

Quoted Prices in

    

Significant

    

Significant

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Marketable equity securities

 

$

1,272

 

$

 —

 

$

 —

 

Interest rate swap assets

 

$

 —

 

$

129

 

$

 —

 

Interest rate swap liabilities

 

$

 —

 

$

2,098

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 2016

 

 

    

Quoted Prices in

    

Significant

    

Significant

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Marketable equity securities

 

$

977

 

$

 —

 

$

 —

 

Interest rate swap asset

 

$

 —

 

$

207

 

$

 —

 

Interest rate swap liabilities

 

$

 —

 

$

1,892

 

$

 —

 

 

10


 

The carrying and estimated fair values of Griffin’s financial instruments are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

May 31, 2017

 

November 30, 2016

 

 

 

Hierarchy

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

    

Level

    

Value

    

Fair Value

    

Value

    

Fair Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

1

 

$

32,144

 

$

32,144

 

$

24,689

 

$

24,689

 

Proceeds held in escrow

 

1

 

 

9,710

 

 

9,710

 

 

3,535

 

 

3,535

 

Marketable equity securities

 

1

 

 

1,272

 

 

1,272

 

 

977

 

 

977

 

Interest rate swaps

 

2

 

 

129

 

 

129

 

 

207

 

 

207

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans, net of debt issuance costs

 

2

 

$

119,970

 

$

120,313

 

$

109,697

 

$

111,103

 

Interest rate swaps

 

2

 

 

2,098

 

 

2,098

 

 

1,892

 

 

1,892

 

 

The amounts included in the consolidated financial statements for cash and cash equivalents, proceeds held in escrow, leasing receivables from tenants and accounts payable and accrued liabilities approximate their fair values because of the short-term maturity of these instruments. The fair values of the available-for-sale securities are based on quoted market prices. The fair values of the mortgage loans are estimated based on current rates offered to Griffin for similar debt of the same remaining maturities and, additionally, Griffin considers its credit worthiness in determining the fair value of its mortgage loans. The fair values of the interest rate swaps (used for purposes other than trading) are determined based on discounted cash flow models that incorporate the cash flows of the derivatives as well as the current Overnight Index Swap rate and swap curve along with other market data, taking into account current interest rates and the credit worthiness of the counterparty for assets and the credit worthiness of Griffin for liabilities.

 

3.    Real Estate Assets

 

Real estate assets consist of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

 

    

Useful Lives

    

May 31, 2017

    

Nov. 30, 2016

 

Land

 

 

 

$

16,502

 

$

17,895

 

Land improvements

 

10 to 30 years

 

 

26,936

 

 

27,592

 

Buildings and improvements

 

10 to 40 years

 

 

165,937

 

 

164,353

 

Tenant improvements

 

Shorter of useful life or terms of related lease

 

 

24,705

 

 

21,925

 

Machinery and equipment

 

3 to 20 years

 

 

11,022

 

 

11,022

 

Construction in progress

 

 

 

 

1,962

 

 

1,659

 

Development costs

 

 

 

 

14,736

 

 

14,615

 

 

 

 

 

 

261,800

 

 

259,061

 

Accumulated depreciation

 

 

 

 

(90,581)

 

 

(86,801)

 

 

 

 

 

$

171,219

 

$

172,260

 

 

Total depreciation expense and capitalized interest related to real estate assets were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

For the Three Months Ended

 

For the Six Months Ended 

 

 

 

May 31, 2017

    

May 31, 2016

    

May 31, 2017

    

May 31, 2016

 

Depreciation expense

 

$

2,112

 

$

1,898

 

$

4,207

 

$

3,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalized interest

 

$

 —

 

$

133

 

$

 —

 

$

217

 

 

On April 28, 2017, Griffin closed on the previously contracted sale of approximately 67 acres (the “2017 Phoenix Crossing Land Sale”) of undeveloped land in Phoenix Crossing, the approximately 268 acre business park master planned by Griffin that straddles the town line between Windsor and Bloomfield, Connecticut. Griffin received cash proceeds of $10,250 before transaction costs and recorded a pretax gain of $7,975 on the 2017 Phoenix Crossing Land Sale. The net cash proceeds of $9,711 from the 2017 Phoenix Crossing Land Sale were placed in escrow for the acquisition of a replacement property as part of a like-kind exchange (“Like-Kind Exchange”) under Section 1031 of the Internal Revenue Code of 1986, as amended, for income tax purposes. Subsequent to May 31, 2017, Griffin completed

11


 

the Like-Kind Exchange when it closed on the purchase of an approximately 277,000 square foot industrial/warehouse building (the “Building”) in Concord, North Carolina, located in the greater Charlotte area. The Building’s purchase price of $18,600 (before allowances) was paid in cash at closing using the proceeds held in escrow from the 2017 Phoenix Crossing Land Sale with the balance paid from Griffin’s cash on hand (see Note 9).

 

In fiscal 2013, Griffin completed the sale of approximately 90 acres of undeveloped land in Phoenix Crossing for $8,968 in cash, before transaction costs (the “2013 Phoenix Crossing Land Sale”). Under the terms of the 2013 Phoenix Crossing Land Sale, Griffin was required to complete certain offsite improvements, primarily roadwork. As a result of Griffin's continued involvement with the land sold, the 2013 Phoenix Crossing Land Sale was accounted for under the percentage of completion method. Accordingly, the revenue and pretax gain on the sale were recognized on a pro rata basis in a ratio equal to the percentage of the total costs incurred to the total anticipated costs of sale, including costs of the required roadwork. Costs included in determining the percentage of completion included the cost of the land sold, allocated master planning costs and the cost of road construction. As of May 31, 2017, Griffin had substantially completed the required improvements related to the 2013 Phoenix Crossing Land Sale; accordingly, all of the remaining revenue and pretax gain on the sale have been recognized in Griffin’s consolidated statements of operations. Griffin’s consolidated statements of operations for the 2017 second quarter and 2017 six month period include revenue of $104 and a pretax gain of $66 from the 2013 Phoenix Crossing Land Sale. The consolidated statements of operations for the 2016 second quarter and 2016 six month period reflected a reduction of previously recognized revenue on the 2013 Phoenix Crossing Land Sale that resulted from an increase in the estimated costs to complete the required road improvements made at that time. From the closing of the 2013 Phoenix Crossing Land Sale in fiscal 2013 through May 31, 2017, Griffin’s consolidated statements of operations have reflected total revenue of $8,968 and a total pretax gain of $6,674 from the 2013 Phoenix Crossing Land Sale.

 

Real estate assets held for sale consist of:

 

 

 

 

 

 

 

 

 

 

    

May 31, 2017

    

Nov. 30, 2016

 

Land

 

$

1,283

 

$

264

 

Land improvements

 

 

679

 

 

 —

 

Development costs

 

 

1,074

 

 

2,728

 

 

 

 

3,036

 

 

2,992

 

Accumulated depreciation

 

 

(325)

 

 

 —

 

 

 

$

2,711

 

$

2,992

 

 

In the 2017 six month period, $1,713 was reclassified from real estate assets to real estate assets held for sale, related to sales agreements currently under contract (see Note 8). Real estate assets held for sale were reduced in the 2017 six month period by $1,994 related to property sales that closed.

 

12


 

 

 

 

 

 

 

 

 

 

4.    Mortgage Loans

 

Griffin’s mortgage loans, which are nonrecourse, consist of:

 

 

 

 

 

 

 

 

 

 

    

May 31, 2017

    

Nov. 30, 2016

 

Variable rate, due October 2, 2017 *

 

$

5,940

 

$

6,034

 

Variable rate, due February 1, 2019 *

 

 

10,158

 

 

10,313

 

Variable rate, due January 27, 2020 *

 

 

3,543

 

 

3,606

 

Variable rate, due January 2, 2025 *

 

 

20,485

 

 

20,744

 

Variable rate, due May 1, 2026 *

 

 

14,015

 

 

14,187

 

Variable rate, due November 17, 2026 *

 

 

26,404

 

 

26,725

 

Variable rate, due March 1, 2027 *

 

 

11,956

 

 

 —

 

5.09%, due July 1, 2029

 

 

6,801

 

 

7,001

 

5.09%, due July 1, 2029

 

 

4,765

 

 

4,905

 

4.33%, due August 1, 2030

 

 

17,468

 

 

17,624

 

Nonrecourse mortgage loans prior to debt issuance costs

 

 

121,535

 

 

111,139

 

Debt issuance costs, net

 

 

(1,565)

 

 

(1,442)

 

Nonrecourse mortgage loans, net

 

$

119,970

 

$

109,697

 


*Griffin entered into interest rate swap agreements to effectively fix the interest rates on these loans (see below).

 

As of November 30, 2016, Griffin retrospectively applied the provisions of ASU 2015-03, regarding the reclassification of debt issuance costs (see Note 1). As a result of the adoption of ASU 2015-03, Griffin reclassified $1,442 as of November 30, 2016 from other assets to mortgage loans, as reflected in the table above.

 

On March 15, 2017, a subsidiary of Griffin closed on a $12,000 nonrecourse mortgage (the “2017 PUB Mortgage”) with People’s United Bank, N.A. (“PUB”). The 2017 PUB Mortgage is collateralized by two industrial/warehouse buildings in New England Tradeport (“NE Tradeport”), Griffin’s industrial park located in Windsor and East Granby, Connecticut. The 2017 PUB Mortgage has a ten year term with monthly principal payments based on a twenty-five year amortization schedule. The interest rate for the 2017 PUB Mortgage is a variable rate of the one month LIBOR rate plus 1.95%. At the time the 2017 PUB Mortgage closed, Griffin also entered into an interest rate swap agreement with PUB for a notional principal amount of $12,000 at inception to effectively fix the interest rate at 4.45% for its full term. Under the terms of the 2017 PUB Mortgage, Griffin entered into a master lease for 759 Rainbow Road (“759 Rainbow”), one of two buildings that collateralize the 2017 PUB Mortgage. The master lease would only become effective if the full building tenant in 759 Rainbow does not renew its lease when it is scheduled to expire in fiscal 2019. The master lease would be in effect until either the space is re-leased to a new tenant or the due date of the 2017 PUB Mortgage.

 

On April 26, 2016, Griffin closed on a $14,350 nonrecourse mortgage ("the 2016 PUB Mortgage") with PUB. The 2016 PUB Mortgage refinanced an existing mortgage (the “2009 PUB Mortgage”) with PUB that was due on August 1, 2019 and was collateralized by four industrial/warehouse buildings totaling approximately 240,000 square feet (14, 15, 16 and 40 International Drive) in NE Tradeport. The 2009 PUB Mortgage had a balance of $7,418 at the time of the refinancing and a variable interest rate of the one month LIBOR rate plus 3.08%. At the time Griffin completed the 2009 PUB Mortgage, Griffin entered into an interest rate swap agreement with PUB to effectively fix the rate on the 2009 PUB Mortgage at 6.58% for the term of that loan. The 2016 PUB Mortgage is collateralized by the same four properties that collateralized the 2009 PUB Mortgage along with another approximately 98,000 square foot industrial/warehouse building (35 International Drive) in NE Tradeport. At the closing of the 2016 PUB Mortgage, Griffin received net mortgage proceeds of $6,932 (before transaction costs), which was net of the $7,418 used to repay the 2009 PUB Mortgage. The 2016 PUB Mortgage has a ten year term with monthly principal payments based on a twenty-five year amortization schedule. The interest rate for the 2016 PUB Mortgage is a variable rate of the one month LIBOR rate plus 2.00%. At the time the 2016 PUB Mortgage closed, Griffin entered into another interest rate swap agreement with PUB that, combined with the existing interest rate swap agreement with PUB, effectively fixes the interest rate of the 2016 PUB Mortgage at 4.17% over the loan term. The terms of the 2016 PUB Mortgage require that if either the tenant that leases approximately 58,000 square feet in 40 International Drive or the tenant that leases approximately 40,000 square feet in 14 International Drive does not extend its respective lease when it expires in fiscal 2021, a subsidiary of Griffin will enter into a master lease of the vacated space. The master lease would be guaranteed by

13


 

Griffin and be in effect until either the space is re-leased to a new tenant or the due date of the 2016 PUB Mortgage Loan, whichever occurs first.

 

On December 10, 2015, Griffin received additional mortgage proceeds of $2,600 (the “Webster Earn-Out”) on the mortgage (the “2015 Webster Mortgage”) obtained by one of its subsidiaries with Webster Bank, N.A. (“Webster”) on an approximately 280,000 square foot industrial building at 5220 Jaindl Boulevard (“5220 Jaindl”) in the Lehigh Valley of Pennsylvania. The 2015 Webster Mortgage closed on September 1, 2015, at which time initial proceeds of $11,500 (before transaction costs) were received. At the time the 2015 Webster Mortgage closed, Griffin had leased approximately 196,000 square feet of 5220 Jaindl. Griffin received the Webster Earn-Out when the tenant that leased that space exercised its option to lease the balance of the building. Subsequently, on November 17, 2016, Griffin closed on a new nonrecourse mortgage (the “2016 Webster Mortgage”) for $26,725. The 2016 Webster Mortgage refinanced the amount then outstanding under the 2015 Webster Mortgage and is now collateralized by 5220 Jaindl along with an adjacent approximately 252,000 square foot industrial building. Griffin received mortgage proceeds of $13,000 (before transaction costs), net of $13,725 used to refinance the 2015 Webster Mortgage. The 2016 Webster Mortgage has a variable interest rate of the one month LIBOR rate plus 1.70% and is due on November 17, 2026. At the time the 2016 Webster Mortgage closed, Griffin entered into an interest rate swap agreement with Webster that, combined with two existing swap agreements with Webster, effectively fixes the interest rate of the 2016 Webster Mortgage at 3.79% over the mortgage loan’s ten year term.

 

On December 11, 2015, Griffin received additional mortgage proceeds of $1,850 (the “KeyBank Earn-Out”) on the mortgage (the “KeyBank Mortgage”) obtained by two of its subsidiaries with KeyBank, N.A. (“KeyBank”), formerly First Niagara Bank, on its properties at 4270 Fritch Drive (“4270 Fritch”) and 4275 Fritch Drive (“4275 Fritch”) in the Lehigh Valley of Pennsylvania. The KeyBank Mortgage closed on December 31, 2014, at which time initial proceeds of $10,891 (before transaction costs) were received, in addition to $8,859 used to refinance the existing mortgage on 4275 Fritch with KeyBank. The KeyBank Mortgage is collateralized by 4270 Fritch, an approximately 303,000 square foot industrial/warehouse building, and 4275 Fritch, an adjacent approximately 228,000 square foot industrial/warehouse building. When the KeyBank Mortgage closed, approximately 201,000 square feet of 4270 Fritch was leased. The KeyBank Earn-Out was subsequently received by Griffin when the remaining vacant space of approximately 102,000 square feet was leased. The KeyBank Mortgage has a variable interest rate of the one month LIBOR rate plus 1.95% and is due on January 2, 2025. At the time the KeyBank Earn-Out was received, Griffin entered into an interest rate swap agreement with KeyBank that, when combined with two existing swap agreements with KeyBank, effectively fixes the interest rate on the KeyBank Mortgage at 4.39% over the remainder of the mortgage loan’s ten year term.

 

As of May 31, 2017, Griffin was a party to several interest rate swap agreements related to its variable rate nonrecourse mortgage loans on certain of its real estate assets. Griffin accounts for its interest rate swap agreements as effective cash flow hedges (see Note 2). No ineffectiveness on the cash flow hedges was recognized as of May 31, 2017 and none is anticipated over the term of the agreements. Amounts in accumulated other comprehensive loss will be reclassified into interest expense over the term of the swap agreements to achieve fixed rates on each mortgage. None of the interest rate swap agreements contain any credit risk related contingent features. In the 2017 and 2016 six month periods, Griffin recognized net losses, included in other comprehensive loss, before taxes of $284 and $1,092 on its interest rate swap agreements. As of May 31, 2017, $1,041 was expected to be reclassified over the next twelve months from accumulated other comprehensive loss to interest expense. As of May 31, 2017, the net fair value of Griffin’s interest rate swap agreements was $1,969, with $129 included in other assets and $2,098 included in other liabilities on Griffin’s consolidated balance sheet.

 

 

5.     Revolving Credit Agreement

 

Griffin has a $15,000 revolving credit line with Webster (the “Webster Credit Line”) that expires July 31, 2018. Griffin has the option to further extend the term of the Webster Credit Line for an additional year, provided there is no default at the time such extension is requested. Interest on borrowings under the Webster Credit Line is at the one month LIBOR rate plus 2.75%. 

 

14


 

The Webster Credit Line is collateralized by Griffin’s properties in Griffin Center South, aggregating approximately 235,000 square feet, and an approximately 48,000 square foot single-story office building in Griffin Center. There have been no borrowings under the Webster Credit Line since its inception in fiscal 2013. The Webster Credit Line secures certain unused standby letters of credit aggregating $1,723 that are related to Griffin's development activities.

 

 

6.    Stockholders’ Equity

 

Per Share Results

 

Basic and diluted per share results were based on the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

May 31, 2017

    

May 31, 2016

 

May 31, 2017

    

May 31, 2016

 

Net income (loss)

 

$

4,727

 

$

(379)

 

$

3,788

 

$

(714)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for computation of basic per share results

 

 

5,001,000

 

 

5,150,000

 

 

5,020,000

 

 

5,151,000

 

Incremental shares from assumed exercise of Griffin stock options (a)

 

 

22,000

 

 

 —

 

 

23,000

 

 

 —

 

Adjusted weighted average shares for computation of diluted per share results

 

 

5,023,000

 

 

5,150,000

 

 

5,043,000

 

 

5,151,000

 


(a)

Incremental shares from the assumed exercise of Griffin stock options are not included in periods where the inclusion of such shares would be anti-dilutive. The incremental shares from the assumed exercise of stock options for the 2016 second quarter and 2016 six month period would have been 2,000 for each period.

 

Griffin Stock Option Plan

 

Stock options are granted by Griffin under the Griffin Industrial Realty, Inc. 2009 Stock Option Plan (the “2009 Stock Option Plan”). Options granted under the 2009 Stock Option Plan may be either incentive stock options or non-qualified stock options issued at an exercise price not less than fair market value on the date approved by Griffin’s Compensation Committee. Vesting of all of Griffin's stock options is solely based upon service requirements and does not contain market or performance conditions.

 

Stock options issued will expire ten years from the grant date. In accordance with the 2009 Stock Option Plan, stock options issued to non-employee directors upon their initial election to the board of directors are fully exercisable immediately upon the date of the option grant. Stock options issued to non-employee directors upon their re-election to the board of directors vest on the second anniversary from the date of grant. Stock options issued to employees vest in equal installments on the third, fourth and fifth anniversaries from the date of grant. None of the stock options outstanding at May 31, 2017 may be exercised as stock appreciation rights.

 

15


 

The following options were granted by Griffin under the 2009 Stock Option Plan to Griffin employees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

May 31, 2017

 

May 31, 2016

 

 

 

    

 

    

Fair Value per

    

 

    

Fair Value per

 

 

 

 

Number of

 

Option at

 

Number of

 

Option at

 

 

 

 

Shares

 

Grant Date

 

Shares

 

Grant Date

 

 

Employees

 

5,000

 

$

11.13

 

101,450

 

7.51 - 11.65

 

 

Non-employee directors

 

6,570

 

$

13.49

 

8,409

 

$

11.30

 

 

 

 

11,570

 

 

 

 

109,859

 

 

 

 

 

The fair values of all options granted were estimated as of the grant date using the Black-Scholes option-pricing model. Assumptions used in determining the fair value of the stock options granted in the 2017 and 2016 six month periods were as follows:

 

 

 

 

 

 

 

 

For the Six Months Ended

 

    

May 31, 2017

    

May 31, 2016

 

Expected volatility

 

32.7 to 39.6

%  

32.9 to 41.1

%  

Risk free interest rates

 

2.1 to 2.2

%  

1.2 to 1.5

%  

Expected option term (in years)

 

7.5 to 8.5

 

5 to 8.5

 

Annual dividend yield

 

0.8 to 0.9

%  

0.9

%  

 

 

 

 

 

 

Number of option holders at May 31, 2017

      

32

 

 

 

Compensation expense and related tax benefits for stock options were as follows: